Companies "go public" via initial public offerings (IPOs) -- issuing shares of stock to be traded in public stock markets like the New York Stock Exchange or Nasdaq.
Consider PieMart Inc. (ticker: GOBBL), maker of tasty cantaloupe pies. Stores can't keep these pies in stock. To meet demand, it needs to make a heck of a lot more pies. It should hire more workers and build more factories, but poor PieMart doesn't have much cash. Oops.
The company isn't doomed, though. It can borrow from a bank. Or it can issue bonds (borrowing money from individuals or institutions and promising to pay the lenders back with interest). It can find some wealthy person or company interested in investing in PieMart. Or, it can go public, issuing shares of stock. Start-ups often use many or all of these options. They frequently secure venture capital funding, for example, a few years before going public. And, until they attract venture capital dollars, they may rely on bank loans.
To go public, PieMart will need to hire an investment-banking firm -- such as Goldman Sachs
If all goes as planned, $15 million will be generated. The investment bank will keep roughly 7% for its services (yowza -- that's more than $1 million!) and PieMart will get the rest. From now on, people will buy and sell PieMart shares from one another on the open market, and PieMart will not receive any more proceeds from these shares. The company got its money when it issued them.
If PieMart later decides to raise more money by offering additional shares of stock to the public, that will be a "secondary offering."
Public companies such as PieMart have obligations to shareholders and the Securities and Exchange Commission (SEC). For example, they have to announce earnings four times a year. Remember that they're partially owned by the public, by shareholders like you. When they spend their new money to grow the business, they're spending your money. That's why you have a right to know what they've been up to.
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Longtime Fool contributor Selena Maranjian doesn't own shares of any companies mentioned in this article.